In the Matter of ) ) Federal-State Joint Board on ) CC Docket No. 96-45 Universal Service )
RESPONSES OF SOUTHWESTERN BELL TELEPHONE COMPANY
TO THE QUESTIONS POSED BY THE JOINT BOARD
Southwestern Bell Telephone Company (SWBT) files these responses to the questions posed by the Joint Board in this proceeding, which were set forth in the Public Notice, DA 96-1078, released July 3, 1996, by the Common Carrier Bureau.
SWBT believes that it is most practical for this proceeding to address universal service issues only as they pertain to the federal jurisdiction. Similarly, SWBT believes that the individual States should be allowed to independently develop solutions for universal service as they pertain to the individual State's jurisdictions. Therefore, SWBT's plan for universal service, and its responses to the questions contained herein, assume the separate and distinct development of federal and individual State universal service plans, each of which is consistent with the Telecommunications Act of 1996 (Act). Further, SWBT assumes these individual plans will be developed consistent with current jurisdictional cost and revenue delineations.
DEFINITIONS ISSUES
1. Is it appropriate to assume that current rates for services included within the definition of universal service are affordable, despite variations among companies and service areas?
Today's current subscribership level of 94% confirms that the current rates for services included within the definition of universal service are not unaffordable for the vast majority of households. Affordability, however, refers to the customer's ability to bear cost, and that ability should be identified in order to determine affordable rate levels. Various implicit and explicit support mechanisms have allowed incumbent local exchange carriers (LECs) to extend below-cost prices to residential customers, regardless of the individual customer's ability to bear the cost of the service provided. SWBT believes that rebalancing of support through moderate increases in the end user common line (EUCL) charge and commensurate reductions in interstate common carrier line (CCL) charges, in conjunction with expanded Lifeline support and an appropriate level of explicit federal universal service support, will maintain subscribership and affordable rates.
2. To what extent should non-rate factors, such as subscribership level, telephone expenditures as a percentage of income, cost of living, or local calling area size be considered in determining the affordability and reasonable comparability of rates?
Although subscribership levels can be used as a threshold question to determine that rates are affordable for those subscribing to service, it is not a good gauge for determining affordability. Subscribership can be influenced by factors other than a customer's ability to pay.
The prices customers pay for universal service should instead be viewed as a household expenditure and, expressed as a percentage of income, be compared with other types of household expenditures to determine affordability. Telecommunications expenditures expressed as a percentage of income provides a basis for determining affordability in comparison with other household expenditures. The average household total telecommunication expenditures currently account for 2.0-2.5% of median income. Basic local exchange expenditures currently account for 0.7% of median income. SWBT suggests 1.0% of State median income is a reasonable and affordable level for universal service expenditures.
3. When making the "affordability" determination required by Section 254(i) of the Act, what are the advantages and disadvantages of using a specific national benchmark rate for core services in a proxy model?
The use of a federal benchmark rate provides a reasonable measure to identify the level above which costs would qualify for high-cost support only to the degree the proxy cost model accurately reflects the actual interstate costs incurred in providing universal service to customers in high-cost areas. If the proxy misstates the actual costs required to be incurred to serve customers in high-cost areas, the resulting support will not be appropriate to maintain universal service in those areas, comparable to that provided in low-cost areas.
4. What are the effects on competition if a carrier is denied universal service support because it is technically infeasible for that carrier to provide one or more of the core services?
Only those carriers willing and able to support the definition of universal service should be funded through a national program. Congress recognized this important principle when it emphatically limited universal service funding to "eligible telecommunications carriers" (47 U.S.C. 254(e)), which are required to "offer the services supported by the Federal universal service support mechanisms." 47 U.S.C. 214(e)(1)(A). Funding a carrier that does not meet that requirement would be contrary to the language of the statute and the clearly expressed intent of Congress.
There is no harm to competition caused by this type of funding. A carrier that chooses to expend the capital necessary to meet qualification and eligibility criteria will receive support on a competitively neutral basis. Those carriers who choose not to expend the necessary capital to meet that criteria may still seek customers in selected markets, but would not receive support for the limited services that it has chosen to provide.
Application of the guidelines in Section 254(c) for defining universal service should result in very few areas that lack a carrier that is technically incapable of providing all the services comprising universal service. Upon defining the services comprising universal service, a reasonable grace period should be established to allow carriers to meet the universal service definition.
5. A number of commenters proposed various services to be included on the list of supported services, including access to directory assistance, emergency assistance, and advanced services. Although the delivery of these services may require a local loop, do loop costs accurately represent the actual cost of providing core services? To the extent that loop costs do not fully represent the costs associated with including a service in the definition of core services, identify and quantify other costs to be considered.
Loop costs, the cost of the cable and wire facilities and the central office subscriber circuit equipment necessary to provide the physical connection between the customer premises and the initial central office, represent the largest share of the costs necessary to provide universal access for core basic services. However, other costs are also essential to providing such universal access. These costs include that portion of the local dial switching equipment necessary to make the connection usable. This would include the portion of the local dial switch which connects the customer to the switch, as well as the traffic-sensitive portion of the switch to connect calls from the customer to other customers. Also, if the core services include a calling scope that encompasses other central office locations, additional switching costs should be included as well as interoffice transmission equipment in the central offices and the interoffice cable and wire facilities.
LECs also incur substantial expenses in addition to the costs described above to make core services available. For example, customer service operations are necessary to allow customers to request service, change service, obtain assistance, and discontinue service. Providing operator services requires substantial costs for facilities and providing customer assistance. Advanced services also require LECs to incur non-loop related costs (e.g., ISDN requires special switching equipment). Moreover, expenses result from the administration and support of SWBT's network and the provision of services over it. These typically include costs associated with land and buildings, motor vehicles, furniture, computers and office equipment.
By way of example, the following Table identifies the amount and types of costs for SWBT's Texas operations that are necessary for SWBT to provide local exchange services, directory assistance, and access to operator services.
SWBT - Texas, 1995
Cost of Local Exchange Switched Network
Cost Category Amount ($M) Percent
Facility-Related Costs11 $1,586M 42.0% 13.0%
Includes authorized $497M $139M 4.0% 0.5% 3.5%
interstate return and $15M $132M 63.0%
income taxes on net $2,369M
investment, maintenance,
depreciation, and network
operations expenses. Loop
Switching Trunk
Operator IOT Subtotal
Services Expense Customer $274M $106M 7.0% 3.0%
Services Operator $380M 10.0%
Services Subtotal
Support Costs Support $221M $203M 6.0% 5.0%
Facilities1 Support $332M $68M 9.0% 2.0% 5.0%
Expenses Corporate $202M $1,026M 27.0%
Expenses Marketing
Expenses Other Support
Costs Subtotal
Total Costs $3,775M 100%
All of the above costs should be considered in determining the amounts associated with universal services.
Various definitions of loop costs also currently exist. The Joint Board and the Commission should be aware of certain shortcomings in using these costs for evaluation of costs related to core services. The 47 C.F.R. Part 69 rules calls for the inclusion of interstate loop costs in the Common Line element. Common Line costs are often interpreted as loop costs for evaluating or setting interstate access rates, even though these only represent the interstate portion of costs (25% of loop costs are assigned to interstate by the separations process). In addition to costs associated with the loop, the Common Line element includes costs of Information Origination/Termination (IOT) equipment. IOT costs include costs associated with pay telephone sets and PBX equipment. If core services were defined as residence only, most of those IOT-related costs should be excluded.
On the other hand, costs assigned to the Common Line element exclude costs related to providing customer services. For instance, a substantial portion of customer service expenses and operator services expenses are not assigned to the Common Line element, but are necessary for providing core services. The majority of such costs have typically been assigned to the intrastate jurisdiction by the separations process. Another commonly used version of loop costs are the total (unseparated) loop costs that are calculated for the interstate Universal Service Fund (USF). The calculation of these costs exclude essential categories of costs related to providing core services, including customer service costs, operator service costs, and costs associated with general support facilities.
Loop costs have also been calculated by cost proxy models such as the Benchmark Cost Model and the Hatfield Model. See Attachment 1, "Which Cost is Right?" These models employ long-run incremental costing methods. The comparisons of the results of these models with SWBT's actual cost data has shown that these models do not reasonably estimate actual facility costs and operating costs associated with providing core services. Most incremental cost methods, by design, do not depict all of the cost of operations and providing universal service. Use of incremental costs for estimating costs of providing core services may substantially understate the actual costs necessary for universal service.
SCHOOLS, LIBRARIES, HEALTH CARE PROVIDERS
6. Should the services or functionalities eligible for discounts be specifically limited and identified, or should the discount apply to all available services?
If the proper mechanism is established, such as a "funds to schools and libraries" approach as described in SWBT's response to Question No. 9 below, then the range of available services for schools and libraries should be sufficiently broad to include all available telecommunications services. This provides schools and libraries with the most flexibility to choose the services and functionalities which best serves their needs. However, if a pricing discount plan is implemented, the list of services will need to be limited because of the regulatory difficulties created by such an approach. Some of these problems are described in further detail below, particularly in response to Question No. 16. In any event, the federal universal service plan should complement the initiatives already taken or that may be taken by the States. The federal effort should not interfere with the progress already made or anticipated by the States.
7. Does Section 254(h) contemplate that inside wiring or other internal connections to classrooms may be eligible for universal service support of telecommunications services provided to schools and libraries? If so, what is the estimated cost of the inside wiring and other internal connections?
Section 254 does not contemplate that inside wiring or other internal connections to classrooms be eligible for universal service support. Section 254(h)(1)(B) limits the scope of support for educational providers and libraries when it makes available, at a discount, only those "services that are within the definition of universal service under subsection (c)(3)." Section 254(c)(3) permits the Commission to designate "additional services" to support for educational providers "in addition to the services included in the definition of universal service" under Section 254(c)(1). Section 254(c)(1), in turn, is expressly limited to "telecommunications services." Through each of these subsections of Section 254, "services" and "telecommunications services" are used interchangeably, with reference to each other, and are clearly synonyms. The phrase "telecommunications service" is based on "telecommunications," which means "the transmission . . . of information." In sum, there is no basis for concluding that wiring beyond any carrier's telecommunication network is a "telecommunications service" or otherwise falls within the support mechanisms to be established under Section 254.
Beyond the obvious definitional problems with the inclusion of inside wiring, it would not be competitively neutral to do so. Since the Act is clear that only telecommunications carriers are eligible to receive universal service funding, the multitude of providers who specialize in inside wiring and internal connections (e.g., electricians, LAN providers) would be at a competitive disadvantage since they would be ineligible to participate in a universal service fund under Section 254.
Any attempt to include inside wire providers as participants in this process would simply not be practical. It would be logistically difficult to attempt to identify all the electricians and other providers who offer inside wiring and to seek payments from them into the universal service fund. Even more problematic would be the apparent necessity to deem electricians and other inside wire providers as telecommunications carriers, which raises numerous regulatory and legal implications at both the federal and state level. SWBT does not believe Congress intended that the Commission extend its authority beyond traditional telecommunications services in this fashion.
8. To what extent should the provisions of Sections 706 and 708 be considered by the Joint Board and be relied upon to provide advanced services to schools, libraries and health care providers?
Sections 706 and 708 provide the ability to create an environment for a more rapid deployment of advanced services, particularly to schools, libraries and rural health care providers. To the extent the Commission and the States eliminate restrictive and outdated regulations which inhibit the attractiveness of the local telecommunications market, then additional infrastructure deployment capable of providing advanced telecommunications and information services is likely to occur. A LEC's ability to effectively compete without burdensome regulations will affect its investment in the infrastructure and its ability and willingness to achieve public policy goals such as connecting schools and libraries to the information superhighway.
9. How can universal service support for schools, libraries, and health care providers be structured to promote competition?
SWBT believes this issue to be an important consideration in deciding how this provision of the Act should be implemented. The Joint Board and the Commission have the opportunity to design a solution that will promote competition and establish the education market as an attractive market sought after by all competitive telecommunications service providers. Alternatively, the solution, if structured improperly, will have the opposite effect -- one where selling services to the education market is not attractive and is subject to extensive regulatory burden. Such a solution will not achieve the results desired by Congress.
To avoid such an outcome, SWBT believes a "funds to schools and libraries" approach will achieve the goal of promoting competition and making the education market an attractive market. The "funds to schools and libraries" mechanism would provide funds directly to schools and libraries for their use in purchasing telecommunications services. Such an approach provides schools with the maximum flexibility while avoiding the need for extensive federal regulatory actions. The "funds to schools and libraries" approach solves many of the problems identified by the questions posed in the Public Notice and, if structured properly, will provide the optimum method for implementing this provision of the Act.
For rural health care providers, the proposal offered by the United States Telephone Association (USTA) appears to be the most reasonable approach for accomplishing the goals of the Act. USTA suggests that services be sold to rural health care providers at statewide-averaged prices. This will extend to those providers the benefits of lower prices realized in competitive markets.
10. Should the resale prohibition in Section 254(h)(3) be construed to prohibit only the resale of services to the public for profit, and should it be construed so as to permit end user cost based fees for services? Would construction in this manner facilitate community networks and/or aggregation of purchasing power?
The provision of the Act is clear. These public institutions cannot offer these telecommunication services for resale. It was not Congress' intent to pass the benefits of these special provisions on to other entities and to put these public institutions in competition with telecommunications carriers.
11. If the answer to the first question in number 10 is "yes," should the discounts be available only for the traffic or network usage attributable to the educational entities that qualify for the Section 254 discounts?
Even if these public institutions were allowed to offer these service on a resold basis, SWBT does not know how the network usage attributable to different parties could as a practical matter be separated.
12. Should discounts be directed to the states in the form of block grants?
While SWBT believes that funds should be allocated to schools and libraries rather than implementing a pure price discount plan at the federal level, SWBT does not believe that allocating funds to the States is appropriate. SWBT recommends that the federal plan provide for direct allocation methods where funds can be allocated directly to schools and libraries without having to pass through State organizations. This would minimize costs, increase timeliness, and ensure maximum use of the collected funds.
13. Should discounts for schools, libraries, and health care providers take the form of direct billing credits for telecommunications services provided to eligible institutions?
With a "funds to schools and libraries" approach, a credit mechanism could be used as the method of managing the funds. Schools and libraries could use credits to purchase telecommunications services and the service provider could seek reimbursement for the credits from the universal service fund. However, if a pricing discount plan is implemented, a billing credit approach could be examined as a more appropriate method than the regulatory intensive effort required to change every tariff price in every jurisdiction for every service included within the definition of universal service for education providers and libraries.
14. If the discounts are disbursed as block grants to states or as direct billing credits for schools, libraries, and health care providers, what, if any, measures should be implemented to assure that the funds allocated for discounts are used for their intended purposes?
There will need to be some simple measures to ensure that funds are being spent appropriately. If an electronic account system were created which restricted fund reimbursement to the offering of the specified telecommunications services as described in SWBT's response to Question No. 6, many of the accountability concerns could be alleviated.
15. What is the least administratively burdensome requirement that could be used to ensure that requests for supported telecommunications services are bona fide requests within the intent of section 254(h)?
SWBT recommends the use of a simplified process. States already know what schools exist within their borders, so each State could provide a list of qualified schools to the fund administrator. Before a qualified school receives its distribution, it could complete a simple form providing check off boxes to verify the existence of a technology plan and provide answers to a few simple questions which are required to demonstrate progress in meeting the Act's goals.
16. What should be the base service prices to which discounts for schools and libraries are applied: (a) total service long-run incremental cost; (b) short-run incremental costs; (c) best commercially-available rate; (d) tariffed rate; (e) rate established through a competitively-bid contract in which schools and libraries participate; (f) lowest of some group of the above; or (g)some other benchmark? How could the best commercially-available rate be ascertained, in light of the fact that many such rates may be established pursuant to confidential contractual arrangements?
If the "funds to schools and libraries" approach is used, a base service price is not necessary. Carriers would compete to provide telecommunications services to schools and libraries, especially since they know that schools and libraries have been given these funds to be used to purchase services. The competitive market will establish pricing levels.
The alternative is to have regulators struggle to establish base service prices for which discounts would apply. For a federal plan, this approach is very problematic. Given that there are many State plans already in existence, the Commission should not impose a specific plan on the States. States should continue to have the flexibility to create plans as they deem appropriate and in the public interest. Imposing specific methods on the States for determining base service prices is inappropriate. Some States may not want a cost-based approach because an incremental costing approach applicable to all telecommunications carriers would likely require extensive regulatory proceedings to determine the costs for every service identified as a special service. While this approach would be incredibly difficult for incumbent LECs, it would be even more problematic for all of the new LECs, interexchange carriers (IXCs), and other carriers entering the telecommunications markets. If an incremental cost approach were implemented, every new telecommunications carrier in every market it serviced should be required to produce cost studies for all of its services since every carrier, even those not deemed eligible telecommunications carriers, are subject to the discount provisions of the Act. For example, if long distance services were included, interexchange carriers would have to produce incremental cost studies for those services. Clearly such an approach does nothing, and, in fact will probably damage the goal to promote competition in the education market.
Likewise, using the lowest commercially-available rate is also problematic. It may be difficult to even identify what the lowest commercially-available rate is. Many times the "best" rate will be provided to large volume customers in a packaged offering. This best price may be proprietary or may not even be identifiable because of the packaging of service offerings. Tariff rates can also be problematic as a basis for a price discount plan. In many cases, services offered to schools and libraries are not described in tariffs. This is particularly true for new entrants that are not required to file detailed tariffs. This will become even more prevalent as competition unfolds, service packaging expands, and LECs are relieved of detailed tariff filing requirements. Basing the solution on today's regulatory model of tariff pricing constructs may prove short-sighted.
The "funds to schools and libraries" approach solves this problem and lets the competitive marketplace establish pricing levels for schools and libraries. It also provides States with the flexibility to keep existing plans and to create new ones which meet their specific needs.
17. How should discounts be applied, if at all, for schools and libraries and rural health care providers that are currently receiving special rates?
This question illustrates another serious problem with implementing a federal pricing discount scheme. Many schools and libraries already receive discounts on services, and attempting to overlay a national pricing discount plan is simply not feasible especially since some of these discount plans have resulted from regulatory agreements reached in States. The "funds to schools and libraries" approach would avoid this problem. Where schools and libraries already have a discount pricing option, they simply purchase the service at that discounted price using the credits provided by the universal service fund. The "funds to schools and libraries" approach would naturally integrate with the many discount plans already in existence.
As previously stated by SWBT, rural health care providers should be offered services at statewide-averaged prices, ensuring reasonable comparability of prices.
18. What states have established discount programs for telecommunications services provided to schools, libraries, and health care providers? Describe the programs, including the measurable outcomes and the associated costs.
SWBT provided a summary of current State plans within its region as Attachment 3 to its initial Comments in this proceeding. For ease of reference, a copy of that Attachment is attached and incorporated by this reference as Attachment 2.
19. Should an additional discount be given to schools and libraries located in rural, insular, high-cost and economically disadvantaged areas? What percentage of telecommunications services (e.g., Internet services) used by schools and libraries in such areas are or require toll calls?
While SWBT has explained that a discount plan is not the best approach at the federal level, SWBT agrees with the principle of providing additional assistance to schools and libraries that are economically disadvantaged or that experience higher telecommunications costs because of the need for long distance services or exceptionally long dedicated transport connections. Additional funding should be allocated to schools and libraries through the "funds to schools and libraries" approach as a means to accommodate these special needs. However, the Joint Board and the Commission should not adopt a presumption of the need for additional assistance simply because a school or library resides in a rural or insular area. Rural or insular areas may have local Internet service providers, and the schools and libraries in that area may not otherwise face high telecommunications costs.
Finally, a point of clarification may be needed. In and of itself, Internet service is not a "telecommunications service." See 47 U.S.C. 153(46). The Common Carrier Bureau agreed that Internet service is an enhanced service in approving a Comparably Efficient Interconnection (CEI) plan[2] and, under the Act, Internet service is properly categorized as an "information service." See 47 U.S.C. 153(20). Although the telecommunications service to provide a connection to an Internet service provider may be appropriately included within the definition of universal service for schools and libraries, the separate charges for the Internet service itself fall outside the scope of Section 254.
20. Should the Commission use some existing model to determine the degree to which a school is disadvantaged (e.g., Title I or the national school lunch program)? Which one? What, if any, modifications should the Commission make to that model?
It seems reasonable to use an existing mechanism for identifying economically disadvantaged schools rather than creating a new approach. However, SWBT is open to alternative approaches which accurately identify these schools.
21. Should the Commission use a sliding scale approach (i.e., along a continuum of need) or a step approach (e.g., the Lifeline assistance program or the national school lunch program) to allocate any additional consideration given to schools and libraries located in rural, insular, high-cost, and economically disadvantaged areas?
Under the "funds to schools and libraries" approach, several factors could be taken into account for determining the distribution of funds. For example, the number of school buildings, the number of students, and the number of economically disadvantaged students could be factored in to create a support plan that would provide sliding scale benefits.
22. Should separate funding mechanisms be established for schools and libraries and for rural health care providers?
Yes, separate federal funds should be established for each of the universal service targets (e.g., low-income customers, high-cost areas, schools and libraries, rural health care providers). This will ensure proper accountability and a targeted focus. SWBT recommends that, for the funding of each of these accounts, that they be combined to calculate a single surcharge level so that the customer sees one surcharge for the recovery of the total universal service funding.
23. Are the cost estimates contained in the McKinsey Report and NII KickStart Initiative an accurate funding estimate for the discount provisions for schools and libraries, assuming that tariffed rates are used as the base prices?
The McKinsey study appears to be the most extensive study on the subject and seems to be a reasonable basis from which to estimate the funding level for a "funds to schools and libraries" approach. Independent of this basis for estimating the funding level is the need to create a specific, fixed annual fund amount. Telecommunications carriers and educators need to know how much money is at issue for accurate forecasting.
24. Are there other cost estimates available that can serve as the basis for establishing a funding estimate for the discount provisions applicable to schools and libraries and to rural health care providers?
NTIA's Reply Comments in this proceeding provide additional information as well as Appendix B in the McKinsey Report.
25. Are there any specific cost estimates that address the discount funding estimates for eligible private schools?
SWBT does not know of any specific cost estimates for private schools. One approach would be to extrapolate estimates from the McKinsey Report.
HIGH COST FUND
General Questions
26. If the existing high-cost support mechanism remains in place (on either a permanent or temporary basis), what modifications, if any, are required to comply with the Telecommunications Act of 1996?
The current high-cost fund, which does not include those costs recovered through implicit support flows, meets the principles embodied in Section 254(b). In response to the Commission's Notice of Proposed Rulemaking concerning the existing federal Universal Service Fund (USF), SWBT evaluated several proposed changes to the USF to help align it with the competitive marketplace.[3] SWBT's position regarding the USF continues to be that changes are not necessary except as specifically identified below. Except for the possible elimination of some funding to Tier 1 LECs,[4] SWBT believes the USF is properly targeted and sized. The USF does help ensure access in "rural, insular, and high cost areas" to telecommunications services at "just, reasonable, and affordable rates." Sections 254(b)(3), (b)(1). SWBT's analysis demonstrated that without the current USF, basic local rates for numerous rural LECs would likely need to increase substantially. The USF is thus a "specific, and predictable" mechanism that is necessary to "preserve and advance universal service." See Section 254(b)(5), SWBT NPRM/NOI Comments, Attachment 1.
A change is necessary, however, to comply with the Act related to funding of the USF. Currently the USF is supported through assessments to IXCs based on their respective shares of pre-subscribed lines. Section 254 requires that "all providers of telecommunications services should make an equitable and nondiscriminatory contribution to the preservation and advancement of universal service." Use of pre-subscribed lines does not meet that requirement in that it only recovers support from toll providers who have customers subscribed to the wireline network. Under this system, numerous carriers are not required to pay support. For example, providers of toll through prepaid calling cards or on a "dial around basis" (10XXX) are exempt from funding. Funding of the USF should be modified so it is consistent with the nondiscriminatory provisions of the Act. Assessment of the federal USF based on interstate retail revenue would be the most appropriate method.
Another topic that needs to be addressed is the "study area" question versus the need to create "universal service areas" as set forth in Section 254. The current "study area" rules limit a "study area" to those established as of November 15, 1984, or those for which a waiver has been approved. While the currently approved waivers have been granted to accommodate purchase/sale of exchanges, there would presumably be no impediments for incumbent LECs, as new entrants requesting a waiver, to establish a new study area that may overlap an existing incumbent's "study area," to perform the cost calculations required by the current rules and to be eligible for support from the existing high-cost fund. Until such time as universal service areas are defined to be smaller than the existing study area, entry by an existing LEC into another LEC's "study area" should not result in USF funding for costs incurred to enter areas served by other LECs.
If, as defined by the Act, a rural incumbent were to expand its study areas into the area of another rural incumbent, reassessing USF support may be appropriate because both LECs are on equal footing with regard to qualifications for USF (presumably both are rural and high-cost and in both cases the study area and the universal service area established under the Act are synonymous). However, it is inappropriate for a rural or non-rural incumbent LEC to enter the territory of a non-rural LEC and to receive support from the USF for the new area. SWBT believes an inappropriate disparity would be created in these potential situations, due to the fact that such non-rural LEC's costs are the average of low- and high-cost areas, whereas the costs of a rural LEC are relatively high as a result of the rural nature of its study area. In sum, the rural LECs should not be allowed to enter portions of a non-rural LEC's service area and continue receiving support while the non-rural LEC cannot.
The new entrant should cost justify their support and recover support only for facilities it owns that are used to provide universal service. New entrants should not receive support for services provided via resale.
Although other modifications would not be necessary to the current high-cost rules, there is a sincere need to address other high-cost funding mechanisms such as Long Term Support (LTS), which is currently funded implicitly through an addition to specific LECs not in the National Exchange Carrier Association (NECA) Common Line Pool. LTS and CCL, both currently forms of implicit support, should be recovered explicitly.
27. If the high-cost support system is kept in place for rural areas, how should it be modified to target the fund better and consistently with the Telecommunications Act of 1996?
As stated previously, SWBT believes the fund is properly targeted with the exception of Tier 1 LECs.[5] Largely, the small LEC fund recipients will not face competition in the near future and in certain cases may be exempt from Section 252 interconnection requirements. These carriers are likely to be the only "eligible telecommunications carrier" for their service areas. Consequently, making the USF available to new LECs entering rural territories will be at most a minor requirement. Assuming new LECs enter these markets, it is not necessary to have a complex process in place to determine which LEC would receive USF support.
28. What are the potential advantages and disadvantages of basing the payments to competitive carriers on the book costs of the incumbent local exchange carrier operating in the same service area?
SWBT believes that new entrants should only recover support in an area if the incumbent is receiving support, and then only for those costs attributable to its own facilities used to provide universal service. Support, if any, for resold services must go to the provider of the facilities underlying the services. New entrants should also have the same regulatory obligations as the incumbent LEC (e.g., quality of service, reporting).
Finally, new entrants should justify their support based on their own costs. If their claims are accurate, the costs of prospective entrants will be less than the incumbent LEC's costs, which should serve as a cap on the level of support received by any entrant. If the Joint Board determines that a new entrant does not need to cost justify its support, but instead simply receive the incumbent LEC's level of support per line, if any, the following advantages and disadvantages would be realized:
Advantages:
- Simple and easily administrable. Costs studies are not required by new entrants and all parties clearly know the level of support per customer.
- No complex proxy studies would be required. The difficulty of selecting a particular proxy would be avoided.
- Each competitor would receive exactly the same support amount per line for which it owns the underlying facility.
Disadvantages:
- Support payments to new entrants would not reflect their actual costs. Entrants could under-recover or over-recover their costs. Either outcome would be problematic under Section 254: either the support would not be "sufficient" under Section 254(e) or the excessive funds would not be used in the manner required by that same subsection.
- May result in less efficient operation of the marketplace. If the incumbent LECs costs are higher, entrants would not have an incentive to reduce costs as much as they would otherwise, since they may be able to recover additional amounts from support payments based on ILEC's costs.
- Incumbent LECs would need additional resources (compared to its competitors) and incur associated expenses necessary to produce required cost studies. This results in a competitive disadvantage to the ILECs by requiring additional costs.
- Continued regulation and monitoring is required to review ILEC cost studies.
29. Should price cap companies be eligible for high-cost support, and if not, how would the exclusion of price cap carriers be consistent with the provisions of section 214(e) of the Communications Act? In the alternative, should high-cost support be structured differently for price cap carriers than for other carriers?
Section 214(e) does not provide for the exclusion of any group of carriers, including price cap LECs (as currently understood under Commission Rules). Excluding any carrier based upon the method under which it is regulated would be wholly inconsistent not only Section 214(e), but the Act as well. Being categorized as a price cap LEC denotes absolutely nothing about the costs incurred by that LEC to provide service in any of its areas. For example, within the serving area of a price cap LEC, such as SWBT in Texas, there are both low-cost areas and high-cost areas which SWBT must serve because it is the carrier of last resort (COLR). This is shown by the actual embedded cost information provided by SWBT in its February 14, 1996, and February 19, 1996, ex partes. SWBT believes that all price cap LECs experience such variations in costs to serve.
Price caps are instead a form of rate regulation intended to eliminate some of the disincentives and perverse incentives created by the historical method of rate base, rate of return regulation. Indeed, assuming for the sake of argument that price cap regulation were the answer, then the entire universal service issue could be solved by a stroke of the regulatory pen by merely adopting price cap regulation for all LECs. With Sections 254 and 214, Congress clearly rejected that notion and understood that high-cost areas do indeed exist.
Congress also did not believe that competition alone would provide universal service at affordable prices in those high-cost areas. Sections 254 and 214 were based on an understanding that there are high-cost areas that either will not be served or served at higher-than-desirable prices absent regulatory intervention. Consistent with its desire for competition in all telecommunications markets, Congress established a framework to make the regulatory intervention explicit and competitively neutral in both its funding and its distribution.
Using that framework to establish mechanisms to discriminate against price cap LECs (or Tier 1 LECs) would violate Sections 254 and 214 in both letter and spirit, would be unreasonable, arbitrary, capricious, and an abuse of discretion, and violate the substantive due process and/or equal protection rights of price cap LECs. Any distinction between the funding mechanisms used to support high-cost areas served by non-price cap LECs and those of price cap LECs would implicitly rest on the assumption that the price cap LECs could somehow "afford" funding of a lesser amount.
30. If price cap companies are not eligible for support or receive high-cost support on a different basis than other carriers, what should be the definition of a "price cap" company? Would companies participating in a state, but not a federal, price cap plan be deemed price cap companies? Should there be a distinction between carriers operating under price caps and carriers that have agreed, for a specified period of time, to limit increases in some or all rates as part of a "social contract" regulatory approach?
A price cap LEC should be defined as a LEC under price cap regulation, with no sharing obligation and no price freezes on any of the regulated services, in both the federal and State jurisdiction. LECs operating under price cap regulation in only one jurisdiction would not be deemed to be a price cap LEC. LECs that are operating under "social contracts" to limit or freeze some prices should be allowed greater pricing flexibility for other services or the amount of high-cost support should be adjusted to compensate for the "social contract." If a LEC is denied additional flexibility to rebalance rates, additional explicit support should be provided until the rates under the "social contract" can be adjusted.
See also response to Question No. 29.
31. If a bifurcated plan that would allow the use of book costs (instead of proxy costs) were used for rural companies, how should rural companies be defined?
A plan should not be adopted that forces non-rural LECs to use proxies which are not reflective of the network used to provide universal service. Although the Act defines "rural" carriers, a carrier should not be excluded from the use of book costs to determine high-cost support based on that definition and distinguishing between "rural" and "non-rural" companies. Even with LECs that would be considered non-rural under the definition of rural LECs from the Act, there may exist areas served by those "non-rural" LECs that are "rural areas" with high costs. For example, SWBT serves urban, suburban, and rural areas. In Texas, 203 SWBT wire centers (approximately 500,000 lines) are in areas where the line density is less than 25 lines per square mile; 183 wire centers (approximately 2,000,000 lines) are in areas where the density is between 25 lines and 500 lines per square mile; and 127 SWBT wire centers (approximately 4,500,000 lines) are in areas with a density greater than 500 lines per square mile.
Moreover, attempting to distinguish between "rural" and "non-rural" carriers for the purpose of determining universal service costs or support would also violate Sections 254 and 214, would be unreasonable, arbitrary, capricious, and an abuse of discretion, and violate the substantive due process and/or equal protection rights of "non-rural" LECs, for the same reason as attempting to distinguish between "price cap" LECs and other LECs. See response to Question No. 29.
32. If such a bifurcated approach is used, should those carriers initially allowed to use book costs eventually transition to a proxy system or a system of competitive bidding? If these companies are transitioned from book costs, how long should the transition be? What would be the basis for high-cost assistance to competitors under a bifurcated approach, both initially and during a transition period?
A proxy or competitive bidding should not be mandated, either as a final solution or in a transitional period. As will be discussed further in response to Question Nos. 35-48, proxies have not been shown to be more accurate in determining high-cost areas, and in SWBT's analysis of the BCM, have not even shown a consistent ability to determine relative costs when compared to actual costs. SWBT has serious questions regarding the practical implementation of competitive bidding and if a bidding process would properly implement the Act.
33. If a proxy model is used, should carriers serving areas with subscription below a certain level continue to receive assistance at levels currently produced under the HCF and DEM weighting subsidies?
The current HCF (USF) and DEM weighting should be retained for small LECs, regardless of subscribership levels.
Proxy Models
34. What, if any, programs (in addition to those aimed at high-cost areas) are needed to ensure that insular areas have affordable telecommunications service?
Existing explicit federal support as well as rate restructuring to address the CCL charge will assist in assuring a universally available network is maintained in high-cost insular areas. Lifeline and Linkup programs should also be available to meet the needs of low-income subscribers in these areas.
35. US West has stated that an industry task force "could develop a final model process utilizing consensus model assumptions and input data," US West comments at 10. Comment on US West's statement, discussing potential legal issues and practical considerations in light of the requirement under the 1996 Act that the Commission take final action in this proceeding within six months of the Joint's Board's recommended decision.
Question Nos. 35 - 48 deal with various aspects of the proxy models that have been introduced in this proceeding. The Commission has requested, and SWBT anticipates filing, further comments regarding these models on August 9, 1996. However, SWBT has consistently and clearly demonstrated in this docket and others (e.g., CC Docket Number 96-98) that the proxies proposed to date do not adequately reflect the actual costs incurred in the provision of universal service. Moreover, these models frequently misstate the level of support necessary for a particular LEC. Interestingly, these models are continually being updated and modified to reflect changes in assumptions, to correct errors, and to add variables not previously considered. These continued adjustments cause the current models to be extremely suspect.
SWBT understands the desire to have a costing process that can be used for any telecommunications carrier. Additionally, SWBT understands that, especially as it relates to large LECs, it will be necessary to derive costs which are much more discrete than current study level costs. SWBT also understands the possible reluctance of regulators to rely on incumbent LEC costs.
However, none of these considerations justify the adoption of any proxy (including all of those proposed to date) which does not adequately reflect the actual costs necessary to provide universal service. Attachment 1 to these Responses displays, to the extent that such data is available to SWBT, the results derived from the various models, comparing such to actual costs.
Prior to the adoption of any proxy cost model, the Joint Board and the Commission should ask and require answers to the following questions:
1) Why have the model results changed with each new output?
2) What variables were added?
3) What new assumptions were necessary?
4) What assumptions and variables are missing?
5) Why do the models produce differing results between themselves?
6) Which set of variables and assumptions, if any, are correct?
7) Why do some models generally generate more than actual costs for small rural LECs when a number of IXCs have argued that the actual costs of these same small LECs are overstated?
8) Why are the costs generated by the models for large LECs often less than actual costs? SWBT has shown in its submissions that the difference in cost levels between proxies and actual costs are not, as a number of IXCs often argue, inefficient and/or poor investment decisions. These arguments are absurd, and without any factual support. Incumbent LECs, especially Tier 1 LECs, have properly and efficiently expended resources to maintain universal service and have been thoroughly scrutinized by Federal and state regulators to safeguard against the matters of which those IXCs claim.
9) Who determines when the models should be updated to reflect technology, network, and other pertinent changes? What technologies should be reflected at that time?
The questions could continue. Those posed so far remain unanswered by the proponents of the proxies. In fact, since the proxies have been introduced, as such questions have been asked and model differences uncovered, the models have been revised in an attempt to mitigate the issues. Unfortunately, the results continue to deliver inexplicably differing results. These revisions have not improved the models, but have simply yielded a much more complex model.
SWBT does not believe that the use of a proxy cost model to determine universal service support levels is in concert with the Act. Universal service is now provided via actual network facilities that have actual underlying costs. These costs have survived continued close scrutiny in the past. These costs have been appropriately placed to develop a network designed to deliver quality services to customers upon demand. Allegations of others regarding LEC actual costs which are often used to support adoption of proxy models simply have no basis in fact. Such allegations cannot be relied upon to justify the use of any proxy model which does not adequately replicate actual costs, which have not been subjected to the intense scrutiny that LEC actual costs have undergone, and which will not provide "sufficient" support for universal service.
Until the questions posed above are adequately addressed and until a proxy model is developed which can adequately replicate actual costs, the Commission should continue to rely on actual costs. If some large LECs are unable to disaggregate their study areas, then perhaps limited use of a proxy model might be appropriate to disaggregate those actual costs, thereby minimizing the distortions created by the proxy models.
Moreover, the statement referenced by US West as referenced in the instant question was preceded by the qualifier that "If the Commission makes the threshold decision that a 'proxy modeling approach' represents the most efficient and effective way to target high-cost support in a multi-vendor marketplace." It is not likely that an industry group (which would include LECs that support proxies, LECs that do not support proxies, IXCs that want the lowest possible amount of support, potential payers that also want the smallest possible fund, and recipients that want the largest possible fund) would be able to agree on model logic, much less the inputs to such a model. Some parties would also advocate the number of variables be extensive, while others would want to have no variables in a nationwide model (one of the initial reason for proxies to be considered was the concern regarding ability to manipulate data and the need for a process independent of company-specific data ). SWBT is nevertheless willing to work with an industry group to determine if a proxy model can indeed be developed that accurately reflects actual costs, and thereby would supply universal service support that would be "sufficient" under the Act.
36. What proposals, if any, have been considered by interested parties to harmonize the differences among the various proxy cost proposals? What results have been achieved?
The documentation of the Benchmark Cost Model 2 (BCM2) released July 3, 1996, provides some information that would appear to be in response to questions raised by others of the original BCM released in late 1995. Apparently, as a result of revised assumptions, variables, and other model attributes, the output of the BCM2 shows a significantly higher cost ($59.3 billion in BCM2 versus $25.4 billion in BCM1) than the original BCM. To harmonize the differences between the models, it would be necessary to also reconcile significantly different assumptions and network designs upon which the models are based. Even if such were feasible, the credibility of these models would be even more questionable.
37. How does a proxy model determine costs for providing only the defined universal service core services?
The existing proxy models, which are based on numerous assumptions and hypothetical guidelines unique to each model, have provided little explanation regarding how the theoretical costs that have been calculated meet the definition of universal service that has been proposed in this proceeding. The costs calculated by a proxy model must reflect the definition of universal service. The success of such an approach is based on the ability of the model designer to accomplish that objective.
38. How should a proxy model evolve to account for changes in the definition of core services or in the technical capabilities of various types of facilities?
Any proxy model would have to be reevaluated and changed each time the definition of universal service changed, or when the technical capabilities of the facilities providing universal service changed. This would require that some administrative process be established to continually review the latest technologies for applicability to meet the subjective forward-looking criteria typically established in these types of models. This continuing reevaluation and subjective analysis of the best forward-looking technology may, in fact, result in newer technology and/or facilities being held out as an inappropriate standard.
In contrast, the use of actual costs would reflect the implementation of new technologies and/or facilities as they are actually placed in service.
39. Should a proxy model account for the cost of access to advanced telecommunications and information services, as referenced in section 254(b) of the Act? If so, how should this occur?
No. Proxies have not been shown to reflect actual costs of providing universal service.
40. If a proxy model is used, what, if any, measures are necessary to assure that urban rates and rates in rural, insular, and high-cost areas are reasonably comparable, as required in Section 254(b)(3) of the 1996 Act.
The comparability of urban and rural rates should continue to be the responsibility of State regulatory commissions.
41. How should support be calculated for those areas (e.g., insular areas and Alaska) that are not included under the proxy model?
Actual costs should be used for all areas. A proxy model should not be adopted unless it adequately addresses the entire definition of universal service and all of those areas for which universal service is an objective.
42. Will support calculated using a proxy model provide sufficient incentive to support infrastructure development and maintain quality service?
No, a proxy model that does not reflect the actual costs of providing service provides no incentive to the further development of the infrastructure.
43. Should there be recourse for companies whose book costs are substantially above the costs projected for them under a proxy model? If so, under what conditions (for example, at what cost levels above the proxy amount) should carriers be granted a waiver allowing alternative treatment? What standards should be used when considering such requests?
All carriers should have the option to present book costs. There should be no artificial or arbitrary conditions on the ability of a carrier to seek such a waiver. The question demonstrates the problem with proxies in determining which number is correct. Attachment 1 shows a limited comparison of some of the data presented in connection with this proceeding. This Attachment addresses the question "Which Cost is Right?".
44. How can a proxy model be modified to accommodate technological neutrality?
Unless a proxy model can adequately replicate actual costs, its use is inappropriate. Absent such a demonstration, SWBT does not believe the models should simply be modified for the sake of being able to say technological neutrality was somehow taken into account.
45. Is it appropriate for a proxy model adopted by the Commission in this proceeding to be subject to proprietary restrictions, or must such a model be a public document?
All data and the proxy model must be available to the public. The data and calculations used in the USF are publicly available, and still unfounded allegations are made and concerns expressed that the process is being "manipulated." One of the alleged reasons for developing a proxy was to create a publicly available process and set of data that would not be susceptible to manipulation, and which would theoretically provide for portable support to all incumbent LECs and new entrants on the same basis. Presumably, each participant should have the right to verify that inputs and calculations pertaining to its area are correct. Proxy models must be completely public to provide a competitively neutral basis for distributing universal service funds. Even thinking that a proxy would be allowed to contain information not available to public access and review would run counter to the existing, though unfounded concerns about the use of company-specific cost data being manipulated to gain some unspecified advantage. In fact, there should be a greater concern that the proxy models may be manipulated to achieve desired competitive results using the regulatory process.
46. Should a proxy model be adopted if it is based on proprietary data that may not be available for public review?
No. See response to Question No. 45.
47. If it is determined that proprietary data should not be employed in the proxy model, are there adequate data publicly available on current book costs to develop a proxy model? If so, identify the source(s) of such data.
Actual costs submitted by each eligible carrier should be the basis for any high-cost mechanism. Under the current USF each LEC submits data that is used to calculate a cost and determine a payment based on the relationship to a nationwide average. This same approach could be used to obtain data for a new high-cost fund.
48. Should the materiality and potential importance of proprietary information be considered in evaluating the various models?
No proxy model should be adopted unless it and the data necessary to run the model is publicly available.
Competitive Bidding
49. How would high-cost payments be determined under a system of competitive bidding in areas with no competition?
Competitive bidding for universal service support should be rejected by the Joint Board and the Commission. This proposal may seem theoretically attractive but, if adopted, would result in the following consequences:
a) Allow manipulation of the process by new entrants. New entrants could selectively construct facilities to lower cost customers in high-cost areas. The remaining customers would be served via resale of the incumbent LEC's services or use of network elements. The new entrant is uniquely and unfairly advantaged in the competitive bidding process because the new entrant (as a result of its lower facilities cost to serve a few selected customers) can underbid the incumbent LEC which must provide facilities to all of the remaining higher cost customers.[6] Competitive bidding can work only in an environment where all competitors face equivalent regulations, including a requirement to build its own facilities to serve.
b) Competitive bidding is at odds with the Act. Competitive bidding discourages competition in rural and high-cost areas because as bidding manipulation discussed above occurs, new entrants will be less likely to construct facilities to serve high-cost customers. Their own tactics will serve to diminish the economic incentives to construct those facilities. Moreover, the incumbent LEC may be required to reduce service quality, to increase rates to its remaining customers in that area, or to place its financial viability at risk. Finally, the development and delivery of new and advancing services and technologies will be disincented in light of the manipulation and economic disadvantages. Each of these consequences go against the very grain of the Act.
c) Competitive bidding would result in additional layers of administration and regulation, which is in direct conflict with the intent of the Act.
50. How should a bidding system be structured in order to provide incentives for carriers to compete to submit the low bid for universal service support?
See SWBT's position above.
51. What, if any, safeguards should be adopted to ensure that large companies do not bid excessively low to drive out competition?
See SWBT's position above.
52. What safeguards should be adopted to ensure adequate quality of service under a system of competitive bidding?
Competitive bidding is inherently subject to the manipulations and consequences described above; SWBT is unaware of how to ensure adequate safeguards for quality of service under a competitive bidding scenario.
53. How is collusion avoided when using a competitive bid?
See SWBT's position above.
54. Should the structure of the auction differ if there are few bidders? If so, how?
See SWBT's position above.
55. How should the Commission determine the size of the areas within which eligible carriers bid for universal service support? What is the optimal basis for determining the size of those areas, in order to avoid unfair advantage for either the incumbent local exchange carriers or competitive carriers?
See SWBT's position above.
Benchmark Cost Model (BCM)
56. How do the book costs of incumbent local exchange carriers compare with the calculated proxy costs of the Benchmark Cost Model (BCM) for the same areas?
In an ex parte dated February 22, 1996 in CC Docket No. 80-286, SWBT provided a company-by-company comparison of the loop investment per loop/household, and the loop cost per loop/household results of the BCM and 1994 Universal Service Fund data. A copy of that ex parte is attached hereto as Attachment 3.
57. Should the BCM be modified to include non-wireline services? If wireless technology proves less costly than wireline facilities, should projected costs be capped at the level predicted for use of wireless technology?
SWBT believes that support must be based on actual costs as stated herein.
58. What are the advantages and disadvantages of using a wire center instead of a Census Block Group as the appropriate geographic area in projecting costs?
SWBT supports using either an exchange or wire center definition for universal service area.
Advantages of Using Exchanges or Wire Centers Rather Than Census Block Groups:
1) It is consistent with the existing local exchange rate definition for customers.
2) It is well defined and data is tracked on an exchange or wire center basis.
3) Using existing areas keeps the amount of additional regulatory and administrative requirements at a minimum.
4) Census Block Groups (CBG) do not conform to existing LEC service area boundaries. Consequently, if CBGs are arbitrarily assigned, costs may be misallocated to a particular LEC and would not accurately portray actual universal service support requirements. Wire centers and exchanges do not suffer from this deficiency.
5) Using existing exchanges or wire centers to determine eligibility for universal service support does not disadvantage new entrants. If they had not planned to serve an entire exchange, they can simply use resale provisions to offer service to the remaining customers in the exchange.
59. The Maine PUC and several other State commissions proposed inclusion in the BCM of the costs of connecting exchanges to the public switched network through the use of microwave, trunk, or satellite technologies. Those commenters also proposed the use an additional extra-high-cost variable for remote areas not accessible by road. What is the feasibility and the advisability of incorporating these changes into the BCM?
The question clearly demonstrates why proxy models are inappropriate. Certainly additional variables can be added. However, the constant need to modify and alter these models should lead one to question the validity and the credibility of the model producing results that must be adjusted. If the model does not produce accurate results, the model should be thrown out, not its outputs adjusted to make them right.
60. The National Cable Television Association proposed a number of modifications to the BCM related to switching cost, fill factors, digital loop carrier subscriber equipment, penetration assumptions, deployment of fiber versus copper technology assumptions, and service area interface costs. Which, if any, of these changes would be feasible and advisable to incorporate into the BCM?
See SWBT response to Question No. 59 and SWBT's position on proxy cost models.
61. Should the support calculated using the Benchmark Cost Model also reflect subscriber income levels, as suggested by the Puerto Rico Telephone Company in its comments?
Proxy models, however inappropriate, simply attempt to identify high-cost markets and some limited proxy of costs. They do not by themselves derive support levels.
Median household income can be used as one input in determining an affordable level of household expenditures for universal service. Costs above the affordable level would be considered "high cost" and eligible for explicit support. SWBT has supported 1.0% of a State's median income as an affordable level, thereby acknowledging the economic variances between States. Other programs such as Lifeline and Linkup deal directly with the ability of low-income customers to initiate and pay for telephone service.
62. The BCM appears to compare unseparated costs, calculated using a proxy methodology, with a nationwide local benchmark rate. Does use of the BCM suggest that the costs calculated by the model would be recovered only through services included in the benchmark rate? Does the BCM require changes to existing separations and access charge rules? Is the model designed to change as those rules are changed? Does the comparison of model costs with a local rate affordability benchmark create an opportunity for over-recovery from universal service support mechanisms?
SWBT supports separate federal and State universal service funds consistent with current jurisdictional definitions. However, if a federal fund is developed based upon unseparated proxy costs, there are three basic components of determining universal service: (i) a measure of costs, (ii) a measure of revenues, and (iii) a measure of support. If the proxy is used to provide the measure of cost (although demonstrably inappropriate) and the benchmark is used to provide the measure of revenues, the measure of support is the costs less the revenues. The support revenues derived from such a fund should be used by the incumbent LEC to reduce, on a revenue neutral basis, the implicit support contained in the interstate and intrastate CCL rates, as well as interstate and intrastate toll rates. The use of any proxy would require changes to the existing Universal Service Fund rules (47 C.F.R. Part 36, Subpart F) and to the section on the limitations in the interstate allocation (47 C.F.R. [[section]]36.154(f)). Changes to other sections of 47 C.F.R. Part 36 may be necessary if the proxy results recover what is currently considered to be intrastate costs.
63. Is it feasible and/or advisable to integrate the grid cell structure used in the Cost Proxy Model (CPM) proposed by Pacific Telesis into the BCM for identifying terrain and population in areas where population density is low?
It is difficult to answer questions about the CPM because SWBT has been unable to obtain and evaluate this model. SWBT's position on proxy cost models in general is otherwise set forth herein.
Cost Proxy Model Proposed by Pacific Telesis
64. Can the grid cell structure used in the CPM reasonably identify population distribution in sparsely-populated areas?
As to all the questions involving the operation of the CPM, SWBT has not been able to obtain a copy of the model and evaluate the model at this time. It is anticipated that this will be done in the near future and the results of SWBT analysis will be provided to the parties in this proceeding through an ex parte.
65. Can the CPM be modified to identify terrain and soil type by grid cell?
See SWBT's response to Question No. 64.
66. Can the CPM be used on a nationwide basis to estimate the cost of providing basic residential service?
See SWBT's response to Question No. 64.
67. Using the CPM, what costs would be calculated by Census Block Group and by wire center for serving a rural, high-cost state (e.g., Arkansas)?
See SWBT's response to Question No. 64.
68. Is the CPM a self-contained model, or does it rely on other models, and if so, to what extent?
See SWBT's response to Question No. 64.
SLC/CCLC
69. If a portion of the CCL charge represents a subsidy to support universal service, what is the total amount of the subsidy? Please provide supporting evidence to substantiate such estimates. Supporting evidence should indicate the cost methodology used to estimate the magnitude of the subsidy (e.g., long-run incremental, short-run incremental, fully-distributed).
The interstate CCL charge recovers a portion of Common Line (primarily loop related) costs and represents a support to universal service. All of the CCL represents an interservice support from access/toll services to recover actual costs of local exchange services, including pay telephone. In order to appropriately maintain this support, LEC should be allowed to restructure interstate CCL recovery to bulk billing on an interim basis and, in the long term, to increase the interstate EUCL. SWBT has submitted to the Joint Board studies that show that revenues generated from local exchange services do not recover their actual costs. The interstate CCL revenue generated by access services provides support for recovery of local exchange costs. See Attachment 2 to SWBT Comments filed in this proceeding on April 12, 1996.
However, since interexchange carriers pass their access costs to their toll customers, ultimately it is interstate toll customers who are supporting the recovery of local exchange costs. In 1995 the total revenue or support to local exchange services generated from the interstate CCL charge was $314 million for SWBT. Nationwide, interstate CCL revenues are $35. billion. $36 million of SWBT's interstate CCL revenues represent recovery of common line costs of other LECs that SWBT must recover through its interstate CCL rates to satisfy its LTS obligations, thus representing an intercompany support flow. The remaining interstate CCL is necessary to recover SWBT's Common Line costs.
Moreover, interstate CCL support generated in some areas recover non-traffic sensitive loop costs associated with serving other areas. To demonstrate these geographic support flows, SWBT has analyzed the interstate Common Line costs assigned to interstate and the current interstate common line revenues, including EUCL and CCL, for each of its wire centers.[7] Following are the results obtained from this analysis.
- for 93 wire centers, interstate EUCL revenues fully recover or over-recover the wire center's Common Line costs. The average interstate Common Line costs in these areas is approximately $3.14 per line. Consequently, the $99 million of CCL revenue generated from switched access services in these areas is used to support the recovery of exchange line costs incurred in other SWBT areas and fund SWBT's LTS obligation.
- 148 wire centers generate combined EUCL and CCL revenues which exceed the wire center's interstate exchange line costs. For this group of wire centers, $44 million of the CCL is necessary to recover their respective costs and the remaining $53 million of CCL revenue generated, represents support that flows to other areas. The average interstate Common Line Costs in these areas is approximately $5.12 per line.
- 994 wire centers have combined EUCL and CCL revenues that fall short of their respective interstate Common Line costs. All of the $116 million of support generated by interstate CCL in these wire centers is necessary to recover their Common Line costs. The average interstate Common Line Costs in these areas is approximately $10.04 per line.
The above analysis demonstrates that approximately half of SWBT's CCL revenue is generated in lower-cost, high-volume areas, but is used to support SWBT's higher-cost areas (and Common Line costs of other LECs via the LTS). The remaining CCL revenue is necessary to recover Common Line costs in high-cost wire center areas where both the EUCL and the CCL is necessary, as well as support from other areas to cover the common line costs in those high-cost areas.
70. If a portion of the CCL charge represents a contribution to the recovery of loop costs, please identify and discuss alternatives to the CCL charge for recovery of those costs from all interstate telecommunications service providers (e.g., bulk billing, flat rate/per-line charge).
The CCL primarily recovers non-traffic sensitive costs associated with the exchange line or loop and information origination termination equipment (pay telephone and other station equipment). Additionally, the CCL recovers cost support for high cost independent LECs through the LTS additive. Non-traffic sensitive costs are most efficiently recovered on a flat rate basis. The current usage sensitive recovery violates the concept and goals of efficiency. The Commission has acknowledged the need for more efficient pricing for recovery of common line costs:
cost-based telecommunications pricing is well worth achieving because a pricing structure in which most nontraffic-sensitive, common line costs are recovered through usage-based charges poses a substantial danger to the long term viability of our Nation's telecommunication system.
MTS and WATS Market Structure, CC Docket Nos. 78-72 and 80-286, Report and Order, 2 FCC Rcd 2953, para. 28 (1987).
There are several options which promote the more efficient recovery of common line costs. These options include:
1. Shift Cost Recovery to the End User Common Line Charge: This option would reduce or eliminate the CCL by shifting cost recovery to the cost causer. The per line/month EUCL charge would be increased to the level necessary to fully recover interstate loop costs. EUCL increases could be phased-in, if desired by the Commission.
Recovering a greater portion of end user loop cost from end users through a rebalancing of the EUCL represents a move toward more efficient pricing which the Commission itself began with the institution of the existing subscriber line charge structure.
2. Recover Common Line Costs from the New Universal Service Fund: To the extent that common line costs are not recovered from the end user, those costs should be recovered from the universal service fund established by this proceeding.
3. Restructure Carrier Common Line Element: Either during a transition period or if #1 and #2, above, are not implemented, then CCL could be bulk-billed or flat-rated on a competitively neutral basis.
4. Deaverage Common Line Rates by Zone: If CCL is retained, the CCL must be deaveraged for more appropriate cost recovery.
5. Remove Long Term Support Recovery from LEC CCL Rates: Beyond pricing changes to more efficiently recover LECs' common line costs, LTS , if retained, should be removed from LECs' CCL rates and recovered separately. It should be recovered from all interstate providers in a manner that is completely separate and independent from LECs' access rates.
LOW-INCOME CONSUMERS
71. Should the new universal service fund provide support for the Lifeline and Linkup programs, in order to make those subsidies technologically and competitively neutral? If so, should the amount of the lifeline subsidy still be tied, as it is now, to the amount of the subscriber line charge?
Funding for Lifeline and Linkup should be explicit. Inasmuch as the purpose of Lifeline and Linkup seeks to address the specific needs of low-income customers, not necessarily high-cost recovery, SWBT recommends establishing a separate support mechanism to identify the amount of support required to provide service to qualifying low-income subscribers. Low-income support for the carrier serving the qualifying customer should be equal to the offset rates normally charged to other customers served by that carrier.
The current rules for Lifeline would have to be modified for any changes in the prescribed cap on the subscriber line charge (SLC), but it would continue to be reasonable to associate the Lifeline amount with the SLC.
Respectfully submitted,
SOUTHWESTERN BELL TELEPHONE
COMPANY
By:________________________________
Robert M. Lynch
Durward D. Dupre
Mike Zpevak
Darryl W. Howard
Attorneys for
Southwestern Bell Telephone Company
One Bell Center, Suite 3520
St. Louis, Missouri 63101
(314) 235-2513
August 2, 1996
1. Is it appropriate to assume that current rates for services included within the definition of universal service are affordable, despite variations among companies and service areas? -1-
2. To what extent should non-rate factors, such as subscribership level, telephone expenditures as a percentage of income, cost of living, or local calling area size be considered in determining the affordability and reasonable comparability of rates? -2-
3. When making the "affordability" determination required by Section 254(i) of the Act, what are the advantages and disadvantages of using a specific national benchmark rate for core services in a proxy model? -3-
4. What are the effects on competition if a carrier is denied universal service support because it is technically infeasible for that carrier to provide one or more of the core services? -3-
5. A number of commenters proposed various services to be included on the list of supported services, including access to directory assistance, emergency assistance, and advanced services. Although the delivery of these services may require a local loop, do loop costs accurately represent the actual cost of providing core services? To the extent that loop costs do not fully represent the costs associated with including a service in the definition of core services, identify and quantify other costs to be considered. -4-
6. Should the services or functionalities eligible for discounts be specifically limited and identified, or should the discount apply to all available services? -8-
7. Does Section 254(h) contemplate that inside wiring or other internal connections to classrooms may be eligible for universal service support of telecommunications services provided to schools and libraries? If so, what is the estimated cost of the inside wiring and other internal connections? -8-
8. To what extent should the provisions of Sections 706 and 708 be considered by the Joint Board and be relied upon to provide advanced services to schools, libraries and health care providers? -10-
9. How can universal service support for schools, libraries, and health care providers be structured to promote competition? -10-
10. Should the resale prohibition in Section 254(h)(3) be construed to prohibit only the resale of services to the public for profit, and should it be construed so as to permit end user cost based fees for services? Would construction in this manner facilitate community networks and/or aggregation of purchasing power? -11-
11. If the answer to the first question in number 10 is "yes," should the discounts be available only for the traffic or network usage attributable to the educational entities that qualify for the Section 254 discounts? -12-
12. Should discounts be directed to the states in the form of block grants? -12-
13. Should discounts for schools, libraries, and health care providers take the form of direct billing credits for telecommunications services provided to eligible institutions? -12-
14. If the discounts are disbursed as block grants to states or as direct billing credits for schools, libraries, and health care providers, what, if any, measures should be implemented to assure that the funds allocated for discounts are used for their intended purposes? -13-
15. What is the least administratively burdensome requirement that could be used to ensure that requests for supported telecommunications services are bona fide requests within the intent of section 254(h)? -13-
16. What should be the base service prices to which discounts for schools and libraries are applied: (a) total service long-run incremental cost; (b) short-run incremental costs; (c) best commercially-available rate; (d) tariffed rate; (e) rate established through a competitively-bid contract in which schools and libraries participate; (f) lowest of some group of the above; or (g)some other benchmark? How could the best commercially-available rate be ascertained, in light of the fact that many such rates may be established pursuant to confidential contractual arrangements? -14-
17. How should discounts be applied, if at all, for schools and libraries and rural health care providers that are currently receiving special rates? -15-
18. What states have established discount programs for telecommunications services provided to schools, libraries, and health care providers? Describe the programs, including the measurable outcomes and the associated costs. -16-
19. Should an additional discount be given to schools and libraries located in rural, insular, high-cost and economically disadvantaged areas? What percentage of telecommunications services (e.g., Internet services) used by schools and libraries in such areas are or require toll calls? -16-
20. Should the Commission use some existing model to determine the degree to which a school is disadvantaged (e.g., Title I or the national school lunch program)? Which one? What, if any, modifications should the Commission make to that model? -17-
21. Should the Commission use a sliding scale approach (i.e., along a continuum of need) or a step approach (e.g., the Lifeline assistance program or the national school lunch program) to allocate any additional consideration given to schools and libraries located in rural, insular, high-cost, and economically disadvantaged areas? -18-
22. Should separate funding mechanisms be established for schools and libraries and for rural health care providers? -18-
23. Are the cost estimates contained in the McKinsey Report and NII KickStart Initiative an accurate funding estimate for the discount provisions for schools and libraries, assuming that tariffed rates are used as the base prices? -18-
24. Are there other cost estimates available that can serve as the basis for establishing a funding estimate for the discount provisions applicable to schools and libraries and to rural health care providers? -18-
25. Are there any specific cost estimates that address the discount funding estimates for eligible private schools? -19-
26. If the existing high-cost support mechanism remains in place (on either a permanent or temporary basis), what modifications, if any, are required to comply with the Telecommunications Act of 1996? -19-
27. If the high-cost support system is kept in place for rural areas, how should it be modified to target the fund better and consistently with the Telecommunications Act of 1996? -22-
28. What are the potential advantages and disadvantages of basing the payments to competitive carriers on the book costs of the incumbent local exchange carrier operating in the same service area? -23-
29. Should price cap companies be eligible for high-cost support, and if not, how would the exclusion of price cap carriers be consistent with the provisions of section 214(e) of the Communications Act? In the alternative, should high-cost support be structured differently for price cap carriers than for other carriers? -24-
30. If price cap companies are not eligible for support or receive high-cost support on a different basis than other carriers, what should be the definition of a "price cap" company? Would companies participating in a state, but not a federal, price cap plan be deemed price cap companies? Should there be a distinction between carriers operating under price caps and carriers that have agreed, for a specified period of time, to limit increases in some or all rates as part of a "social contract" regulatory approach? -26-
31. If a bifurcated plan that would allow the use of book costs (instead of proxy costs) were used for rural companies, how should rural companies be defined? -26-
32. If such a bifurcated approach is used, should those carriers initially allowed to use book costs eventually transition to a proxy system or a system of competitive bidding? If these companies are transitioned from book costs, how long should the transition be? What would be the basis for high-cost assistance to competitors under a bifurcated approach, both initially and during a transition period? -27-
33. If a proxy model is used, should carriers serving areas with subscription below a certain level continue to receive assistance at levels currently produced under the HCF and DEM weighting subsidies? -27-
34. What, if any, programs (in addition to those aimed at high-cost areas) are needed to ensure that insular areas have affordable telecommunications service? -28-
35. US West has stated that an industry task force "could develop a final model process utilizing consensus model assumptions and input data," US West comments at 10. Comment on US West's statement, discussing potential legal issues and practical considerations in light of the requirement under the 1996 Act that the Commission take final action in this proceeding within six months of the Joint's Board's recommended decision. -28-
36. What proposals, if any, have been considered by interested parties to harmonize the differences among the various proxy cost proposals? What results have been achieved? -31-
38. How should a proxy model evolve to account for changes in the definition of core services or in the technical capabilities of various types of facilities? -32-
39. Should a proxy model account for the cost of access to advanced telecommunications and information services, as referenced in section 254(b) of the Act? If so, how should this occur? -33-
40. If a proxy model is used, what, if any, measures are necessary to assure that urban rates and rates in rural, insular, and high-cost areas are reasonably comparable, as required in Section 254(b)(3) of the 1996 Act. -33-
41. How should support be calculated for those areas (e.g., insular areas and Alaska) that are not included under the proxy model? -33-
42. Will support calculated using a proxy model provide sufficient incentive to support infrastructure development and maintain quality service? -33-
43. Should there be recourse for companies whose book costs are substantially above the costs projected for them under a proxy model? If so, under what conditions (for example, at what cost levels above the proxy amount) should carriers be granted a waiver allowing alternative treatment? What standards should be used when considering such requests? -33-
44. How can a proxy model be modified to accommodate technological neutrality? -34-
45. Is it appropriate for a proxy model adopted by the Commission in this proceeding to be subject to proprietary restrictions, or must such a model be a public document? -34-
46. Should a proxy model be adopted if it is based on proprietary data that may not be available for public review? -35-
47. If it is determined that proprietary data should not be employed in the proxy model, are there adequate data publicly available on current book costs to develop a proxy model? If so, identify the source(s) of such data. -35-
48. Should the materiality and potential importance of proprietary information be considered in evaluating the various models? -35-
49. How would high-cost payments be determined under a system of competitive bidding in areas with no competition? -35-
52. What safeguards should be adopted to ensure adequate quality of service under a system of competitive bidding? -37-
56. How do the book costs of incumbent local exchange carriers compare with the calculated proxy costs of the Benchmark Cost Model (BCM) for the same areas? -37-
57. Should the BCM be modified to include non-wireline services? If wireless technology proves less costly than wireline facilities, should projected costs be capped at the level predicted for use of wireless technology? -38-
58. What are the advantages and disadvantages of using a wire center
instead of a Census Block Group as the appropriate geographic area in
projecting costs? -38-
59. The Maine PUC and several other State commissions proposed inclusion in the BCM of the costs of connecting exchanges to the public switched network through the use of microwave, trunk, or satellite technologies. Those commenters also proposed the use an additional extra-high-cost variable for remote areas not accessible by road. What is the feasibility and the advisability of incorporating these changes into the BCM? -39-
61. Should the support calculated using the Benchmark Cost Model also reflect subscriber income levels, as suggested by the Puerto Rico Telephone Company in its comments? -39-
62. The BCM appears to compare unseparated costs, calculated using a proxy methodology, with a nationwide local benchmark rate. Does use of the BCM suggest that the costs calculated by the model would be recovered only through services included in the benchmark rate? Does the BCM require changes to existing separations and access charge rules? Is the model designed to change as those rules are changed? Does the comparison of model costs with a local rate affordability benchmark create an opportunity for over-recovery from universal service support mechanisms? -40-
63. Is it feasible and/or advisable to integrate the grid cell structure used in the Cost Proxy Model (CPM) proposed by Pacific Telesis into the BCM for identifying terrain and population in areas where population density is low? -40-
64. Can the grid cell structure used in the CPM reasonably identify population distribution in sparsely-populated areas? -41-
65. Can the CPM be modified to identify terrain and soil type by grid cell? -41-
66. Can the CPM be used on a nationwide basis to estimate the cost of providing basic residential service? -41-
67. Using the CPM, what costs would be calculated by Census Block Group and by wire center for serving a rural, high-cost state (e.g., Arkansas)? -41-
68. Is the CPM a self-contained model, or does it rely on other models, and if so, to what extent? -41-
69. If a portion of the CCL charge represents a subsidy to support universal service, what is the total amount of the subsidy? Please provide supporting evidence to substantiate such estimates. Supporting evidence should indicate the cost methodology used to estimate the magnitude of the subsidy (e.g., long-run incremental, short-run incremental, fully-distributed). -41-
70. If a portion of the CCL charge represents a contribution to the recovery of loop costs, please identify and discuss alternatives to the CCL charge for recovery of those costs from all interstate telecommunications service providers (e.g., bulk billing, flat rate/per-line charge). -44-
71. Should the new universal service fund provide support for the Lifeline and Linkup programs, in order to make those subsidies technologically and competitively neutral? If so, should the amount of the lifeline subsidy still be tied, as it is now, to the amount of the subscriber line charge? -45-